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Normalize Stock Market

Issue
 
   The stock market allows investors the ability to purchase stock in order to become co-owners in a business, while also providing extra capital for the company to use. Stock ownership becomes mutually beneficial where both sides may profit from the arrangement.

   However, many investors have misplaced or ignored their moral obligations of being co-owners in a business and it resulted in the overall abuse of the stock market. This is unethical to say the least since ownership in a particular company through stock is legitimate, and certain duties and responsibilities are expected as being co-owners in the business.
Unethical Behavior (Abuse)
 
   What constitutes as unethical or abusive behavior in the stock market?
 
   Day traders buy and sell stock without regard to the ownership of a business, and as such, have no real interest in being co-owners in the company. They likewise have no hesitation towards abandoning that business relationship on a moment's notice, and do so, for any given reason.

   This constitutes as being abusive in nature since there isn't any real intent of being a legitimate owner in the business. Because of this, day trading should become illegal and those who continue in such a manner should be held liable for the unwarranted loss of one's shares.

   Another example of abusive behavior is high-speed computer trading since millions of trades are performed in under a second without considering the responsibilities associated with being an owner in the business. Sector rotation is another form of abuse since it occurs during a specific time of the year rather than being due to the actual ownership of a business.

   Momentum investing, panic selling, and the annual rebalancing of one's stock portfolio are all examples of abusive behavior since they disregard the responsibilities of being a co-owner in the business.

   The key to understanding on whether a given practice is abusive or not is ownership. If an investor's behavior is uncharacteristic of being a co-owner in the particular business, then such conduct constitutes as being abusive in nature and should be prohibited in the stock market.
Rule of Thumb

   Perhaps, a general rule of thumb for investors to follow is if they would "quit their job" for the same reason. In other words, when selling stock the investor is giving up their stake as a co-owner in the business and is essentially "quitting their job" with the company.

   Investors should ask themselves this to help distinguish the legitimate sale of stock from an abusive one. For example, would you quit your job if your employer's stock dipped below its 200-day moving average? If not, then it is not a valid reason to sell stock, or you may be held liable by the other shareholders for the unwarranted loss of one's shares.
Solution

   Perhaps, the simplest manner in preventing abuse in the stock market would be to impose a 10-year restriction before a stock may be sold from its original purchase date.

   By following this policy, the frivolous selling of stock that typically occurs within the first year of ownership would be prevented by investors. Day trading, high-speed computer trading, momentum investing, sector rotation, annual rebalancing of portfolios, etc., all typically occur within the first year of ownership.

   This policy will also provide a certain degree of protection against market crashes since investors will need to consider buy-and-hold strategies in 10-year intervals, which will stabilize the market to a certain degree.

   A sell-off may result every 10 years though this downturn may be curtailed with an organized withdrawal policy that permits the selling of 15% of holdings per year after the 10-year period (with hardship withdrawals being exempt). That way, investors may sell a portion of their stock for the purpose of collecting profits, but not do so at the expense of causing a market crash every 10 years.
Other Considerations

   As an alternative to the 10-year restriction policy, since mutual funds consist the majority of money in the stock market (75%), perhaps a simpler solution would be to limit the maximum turnover ratio for all mutual funds to be less than 5%.

   Limiting turnover ratios will determine the drawdown of the market in a given year since mutual funds dictate its direction. For example, placing a 2% turnover limit on mutual funds may result in the stock market experiencing a 3-4% loss for the entire year. Which is pretty stable just by itself without further measures being taken. Liquidity may be provided by offering multiple versions of the fund (e.g., a larger cash fund vs. a better performing fund).

   Overall, imposing a maximum limit on the turnover ratio for mutual funds will result in a stable stock market without the necessity of employing a 10-year restriction/15% organized withdrawal policy.
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